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Wednesday, March 07, 2018

Taking Stock of the New Tax Landscape

To say it has been a rocky start to the Trump presidency is likely all in the eye of the beholder. Many of his major initiatives have not worked out (think building the wall and repealing Obamacare). However, one thing that the administration has now delivered on is the most substantial change to the tax code in over 30 years. While the initial goal was to simplify the tax code, it did not hit the mark of allowing you to fill your taxes out on a postcard.[1] It did almost double the standard deduction, which will likely drastically reduce the number of filers that itemize their taxes. The bottom line is, if you voted for President Trump, then you are probably praising the cut and feel that it will help put more in the pockets of Americans and will spur the economy. If you did not vote for President Trump, then you likely feel this was a way to give a tax cut to the wealthiest Americans and that it will not have a noticeable impact on the lives of middle- and lower-income Americans. Without trying to weigh in on which side of this argument is correct, this article will attempt to detail some of the actual changes that will impact your clients.

Changes to the tax brackets

Initially, part of the tax cut looked to simplify this area and lower the number of brackets. However, we are still looking at seven brackets with mostly lower rates.

Notice that the so-called “marriage penalty” is virtually eliminated in these new brackets. For example, previously, if you had two single clients that each made $120,000 annually (assuming no deductions or other factors) they would fall in the 28% bracket. If they married and filed jointly, they would then fall in the 33% bracket at $240,000 of income. Under the new plan, they would pay 24% as single taxpayers or if they married and filed jointly. That means that those clients will not pay as much in taxes and keep more of their income that could potentially be set aside for retirement.

The Standard Deduction vs. Personal Exemption

This is one area where the tax cut may have lived up to its goal of simplification. The standard deduction has been almost doubled. For single filers it has gone from $6,350 to $12,000 and for couples filing jointly it goes from $12,700 to $24,000. The cost for this is that the personal exemption has been eliminated.[3] You can argue whether or not the elimination of the personal exemption will negate the doubling of the standard deduction in terms of net dollars to your clients (although it almost certainly will for some), but many agree it will drastically lower the number of people who itemize on their taxes.

A side note on deductions: Changes were made to two of the more popular deductions. First, mortgage interest can still be deducted. However, the maximum mortgage amount has been lowered from $1,000,000 to $750,000. This does not apply to current homeowners, only those financing a home after December 15, 2017.[4] Second, the ability to deduct state and local taxes, which was previously unlimited if you itemized, will now be capped at $10,000.[5] Both of these changes will likely affect high net worth clients and may provide an opportunity for producers who can engage them with tax-efficient strategies to offset the loss of the deduction.

Keep in mind that all changes to the code that impact individuals are set to sunset after 2025.

Estate Taxes

For years the exemption on estate taxes has been on the rise. As a result, it actually only affects a small number of American households. The previous tax was 40% on the portion of the estate above $5,600,000 for individuals and $11,200,000 for a couple. These numbers have doubled to $11,200,000 for an individual and $22,400,000 for a married couple.[6] Obviously, this will only affect the wealthiest people. Most planners will likely have very few clients, if any, that benefit from this change. That being said, it is important to be aware that unless extended, the thresholds become effective in 2018 and will revert back to current levels after 2025.

Some Additional Things to Consider

Although the capital gains tax is basically not changing, it is important that producers take note that short-term capital gains are taxed as ordinary income. Therefore, most clients will see a tax decrease as the brackets are now lower.

The child tax credit for children under 17 is doubled from $1,000 to $2,000.

The alternative minimum tax (AMT) has now been indexed to inflation and the AMT exemptions were increased. This should eliminate the problem of middle-income families being subject to AMT due to it initially not being indexed to inflation.

Producers should take note that the ability to recharacterize a Roth IRA conversion back to a traditional IRA is no longer available. This was very popular for accounts that had lost value. The idea was to not pay taxes on the money that you no longer had because of the account drop.

Keep in mind that there were also sweeping changes in the tax code to the way corporations are taxed. For those producers that work with business owners, you should look into the changes as they are largely considered favorable for business owners and should provide opportunities. Obviously, this list is not exhaustive but we hope it gives you some ideas that will help you engage with your clients.

In October 2019, the TruChoice founding firms – American Financial, Ann Arbor Annuity Exchange, GamePlan Financial Marketing and The Annuity Store – began our journey as TruChoice Financial Group (TruChoice). Together, we’re on a mission to bring you a new wholesaling experience, one that helps you take your business to a whole new level.

Your marketing organization, now the TruChoice Ann Arbor Office, will continue to provide the high-touch service and support that you have come to expect. To view the tools currently available on our new producer portal, or to learn about the marketing programs, training resources and other unique benefits available to you through TruChoice, visit us at www.TruChoiceFinancial.com!

We look forward to exploring this new era and the many opportunities it holds for your business with you. Welcome to the TruChoice family!